Simple explanation of The Basic Economic Problem

The Fundamental/Basic Economic Problem is that humans have unlimited wants but there are limited resources to provide the goods and services that fulfil these wants. The economic problem arises due to scarcity, allocating scarce resources in order to meet these unlimited needs and wants is the basic economic problem. People must therefore make choices, and if they act rationally, they choose the choice which provides the lowest opportunity cost. The opportunity cost is defined as loss of other alternatives when one alternative is chosen.

Wants

Something we desire and would like to have but is not essential for survival is a want. Such as iPhones, laptops, fashionable clothing, cars and fast food

Needs

Something that is essential to survival. Such as water, clothing, shelter, food, warmth

Choice

Businesses need to know what to produce, how to produce it to make the most profit, and who to produce it for. The three factors of the basic economic problem for businesses are:

What to produce? What should the economy produce in order to satisfy human wants. Examples include phones, guitars, laptops,

How to produce? Producing goods using the least amount of materials to make the most profit.

For whom to produce? Deciding a target market, e.g. targeting people with a high income or to target the people with a low income. E.g. Luxury car companies such as Bentley or Bugatti would target very wealthy consumers with a high income, whereas McDonalds would be able to market to children as they are not targeting wealthy people.